For Lincoln Murphy, customer success isn’t just a goal – it’s a mindset. As the Customer Success Evangelist at Gainsight, Murphy helps Software-as-a-Service customers achieve success by improving retention, decreasing churn and increasing revenue. In addition to Gainsight, for the past six years, Murphy has worked as a consultant, creating efficient engines of growth for more than 300 SaaS companies.
He shares his business knowledge openly on his blog, Sixteen Ventures, and we’ve learned so much from his advice about how SaaS companies can rapidly accelerate growth. We spoke to Murphy to find out exactly how startups and SaaS companies can find an ideal market, price products correctly, lower churn, and drive growth through free trials.
1. How do you identify your ideal customer and ideal market as a new startup? How often do you need to reassess and change your target customer profile as you grow?
Building an app might be simple, but building a startup is not. (Click to Tweet)
- Lincoln Murphy
As a startup, you have to sit down and figure out who you want to do business with; what’s the market segment that will be the most profitable and is growing the fastest? You also have to consider, when you go to pitch investors, who will they be excited about? If you’re going after X market, investors might not want to invest, but if you’re going after Y market, they may compete to invest in you. The idea of who you want to do business with will ultimately be the early inputs in everything from your product design to marketing.
That’s a big ask, but nobody ever said startups are simple. Building an app might be simple, but building a startup is not. A lot of times, shortcuts are taken because people don’t want to go through all these processes. Often, the companies that struggle are the ones that bypass finding an ideal customer and market. They get a bunch of early adopters and it tricks them into thinking they’re making great progress. Then when it comes time to buckle down and get more in control of marketing, they look at all their early adopters and there are no real patterns. At the very least, if you go after one ideal customer and it falls flat, that was a hypothesis that was proven false and you can move onto another one. If you didn’t really have any strategy, how did you know what didn’t work?
In the early days, there’s going to be a lot of uncertainty, so realize that the customer profile you come up with at first is probably going to change. You should have milestones or key results to help you figure out if you’re making the appropriate progress. Say in the first 90 days of business, you want to have 100 customers. If you’re not on target after a month to hit the mark, you need to reevaluate your target customer. But if and at the end of the first month you’re at 50 customers, there’s nothing wrong with spinning up a new ideal customer to go after. Don’t be tempted to try to do too many things at once, but you don’t have to wait until you’ve seen the complete outcome to try a new test. Most of the time I suggest sticking to 1 or 2 ideal customer profiles at a time, at least at first.
2. How do you find your ideal SaaS pricing model? How should you price your product for your target market?
Saas doesn’t have to mean cheap. Cheap doesn’t scale. (Click to Tweet)
- Lincoln Murphy
I don’t have any interest in cost + pricing, which takes the cost of a product and adds some margin. I’m interested in value pricing, which is based on the value perceived by the customer. I’ve seen early stage SaaS companies try to price by looking at the financial margins of Salesforce.com. They’ll say Salesforce runs at a 30% margin, so we want to come in at a 30% margin too because we want to be like Salesforce. This is not taking into account that Salesforce is a very different company than a startup, and very different than most modern SaaS companies today. If you really understand the value of what your customers are getting, you could have a 300% margin. It doesn’t matter. It’s a price that’s based on the value that your customers are going to achieve.
Pricing is also about understanding who your ideal customer is. The big question has to do with quantity vs quality. Do you want a massive amount of customers or do you want fewer, potentially more profitable customers? It comes back to some of those big questions, like what do we want our company to look like? Do we want to have a large customer support organization? Or do we want to be very much a self-service e-commerce type of company?
A SaaS price should really be an input on a spreadsheet, not an output. In other words, you can figure your operating margins and profitability by using the price you’ve come up with, but price can’t be developed using a spreadsheet and formulas. Pricing is really a function of marketing. Pricing acts as an input to finance and those inputs are not margins and cost – they’re all about the customer. I use the 10x rule. I want my customers to get 10 times the value out of my product than what they paid for it. The bottom line is, SaaS doesn’t have to mean cheap. Cheap doesn’t scale.
3. What are common mistakes new companies make when offering free trials? Why do so many startups make those mistakes?
Free trials are so widely used, and yet so few people get it right. Many startups don’t understand how a free trial works. You see someone map out their customer acquisition flow, and the free trial is just a box on the flowchart rather than a series of steps. If I see that, I know people don’t get it. You end up with a free trial that is an afterthought and is not designed to convert. The problem is, most of the time people say, “Our customers are abusing our system. We should get people to pay up-front, with a 60-day money back guarantee.”
There are some companies out there that are doing amazing free trials. They really are customer-converting machines. They see the importance, and design it and absolutely crush it – I’m talking 80% conversion rates. But the companies that don’t get it, don’t care, and complain about it are getting maybe 5% of people converting to paying customers. You have to want to understand it and apply the knowledge, engineering and design work required to make it effective.
4. How can you drive conversions from free trials?
Go back to the idea of customer success and think about it from a prospect’s standpoint. What does a successful free trial look like to that prospect? Map out a process where someone will think becoming a paying customer is the next logical step. I use a set of metrics I call Common Conversion Activities, which is all of the things that your customers did before they converted to paying customers. What did they do that convinced them to convert? You can also use tools like in-app messaging, triggered emails based on activity, and more, to help people move to the next step. But if the free trial is not designed properly, you won’t have this customer-creating machine.
People always say they want to get more people to the site, but I say don’t worry about getting more people into the top of your funnel. If 100% of your business comes through your free trial, and you could double your conversion rate on free trials from 2% to 4%, you just doubled your revenue. That seems like a no-brainer to me, but it takes people coming to that conclusion on their own, and hopefully more people will.
5. How do you train your sales team to handle discounts in the right way?
Discounts should always lead to higher LTV. (Click to Tweet)
- Lincoln Murphy
You never discount something that someone would be willing to pay for at full price. Discounts should always lead to a higher Customer Lifetime Value (CLV). This is counter to the way we tend to think about discounts. If someone wants a discount and their activity says they’re at Tier A, I’ll offer a discount on Tier B. You have to draw a line in the sand about what you’re willing to do and not willing to do. Are you going to be a reference for me? Can I put your logo on my website? Otherwise why would you discount? Discounts should always lead to higher LTV, otherwise you’re just giving your product away for less money. That’s a slippery slope, and leads to you selling on a price basis. If you’re getting too many requests for discounts, that also may be a symptom of another problem, like going after the wrong customer or having pricing that’s incongruent with the value perception of that target customer.
6. You say that it’s possible for companies to drive down churn even before you sell – how do you accomplish this?
The seeds of churn are planted early. (Click to Tweet)
- Lincoln Murphy
The seeds of churn are planted early. It may be that you’re attracting the wrong audience and trying to sell your product to people who shouldn’t buy your product. For example, if you’re selling to customers that are always looking for a discount, maybe you need to go after a higher-level market. You also shouldn’t over-promise and then under-deliver. I worked with an outsourced email company once that would handle all of your email marketing for you. I remember I showed up at the door and the guy that came to meet me had a shirt on that said “We send email, you make money.” I was there to help them with their massive churn problem. The reality is, they were way over promising what they could do, and eventually, that caught up to them.
Don’t sell the cheapest product. Again, it’s not bad to have a low price, but it has to be congruent with everything else that’s going on – the expected cost of support, the infrastructure, how long it will take to pay back the cost to acquire the customers. If you’re attracting an audience that is very price sensitive and transient – going from one product to another with no feeling of investment – that can cause churn too. You can stop churn if you attract the right customers in the first place, don’t over promise and under deliver, and don’t sell the cheapest product.
7. What metrics do you need to track to find your end-to-end Customer Acquisition Costs (CAC)? Why is this an important metric for growing companies to analyze?
There’s a big bunch of metrics that go into the one thing we call a CAC, which is how much it costs to acquire and support the customer through the acquisition process. I’m talking about a fully-loaded CAC, including the cost of advertising, marketing, sales, support during the free trial and onboarding – basically any cost associated with attracting prospects and getting them to become a paying customer. It’s important to really understand all of these costs. It’s very simple to say I paid $7 for an AdWords click that turned into a customer, so my CAC is $7. That’s wrong. Your customer acquisition cost was the other 100 clicks you got that didn’t produce a customer, so it’s really $707 to get 1 customer.
If you get 1,000 people to your site, and 100 enter your free trial, and you get 1 new customer, the CAC is going to include the cost of sales and support for those 100 you tried to convert during a trial and the marketing costs that you spent to get the 1,000 people to your site in the first place. You need to really understand this, because we need to know how long it takes to pay back that initial acquisition cost. We don’t necessarily want to reduce our CAC; it’s about how fast can we pay it back. If I attract a customer and pay X amount to acquire them and I know it takes 6 months to pay that back, but they churn out after 3 months – that’s a problem. There also may be a situation where I want to actually increase my CAC if I pay it back quickly. We just have to know what it is so we know what to do with it.
8. What can you do to change your total CAC? What metrics should you focus on?
Look for bottlenecks in the entire sales process. For example, you may be getting a large amount of folks to your marketing website, but nobody’s really interacting with your site once they get there. They’re not signing up for a free trial, or any secondary calls to action like a webinar. You know something is wrong with either your site, or who you’re attracting to it. If you’re getting people into your free trial but they’re not converting, we want to look for bottlenecks there. Bottom line is, we can look for these bottlenecks all across the sales process.
To get the most efficiency out of your CAC, we have a whole list of cranks we can turn. Everything from more quickly engaging customers and prospects when they’re on your site, reducing friction in the onboarding process in your free trial, or making their time on the site more efficient. There’s a lot of moving parts here, but ultimately, we look at the whole process and look for those bottlenecks keeping your costs higher than they should be.
9. You recently joined Gainsight as a Customer Success Evangelist. How do you personally define customer success and how do you cultivate it?
Customer success does not mean making your customers happy. (Click to Tweet)
- Lincoln Murphy
I’ve been a Customer Success Evangelist since before I joined Gainsight, but I joined the company because I was excited about what they were doing. Gainsight is a SaaS product that helps you manage your customer success process and get more insight into your customers. But why is customer success something that we even have to convince people they need? Customer success to me is getting the customer to achieve success from the use of your product, in what they’re trying to accomplish – not just what they’re trying to do. It’s really a mindset, to make sure you’re thinking about your customers. We need to understand where our customers are trying to go and get them to that point. That’s very different than seeing the user complete a functional task in the product and, as a vendor, sitting back and calling that success.
Customer success also does not mean making your customers happy – in fact happy customers are not necessarily what we’re looking for. Your best customers are often those who never seem satisfied; they’re always contacting support because they’re really using the system and often breaking the system. And that’s great – those are the customers that are most likely to stick around if we interact properly with them. But it’s the customers we never hear from, that fill out all 10’s on the survey we send out, that we should worry about. We don’t know if they’re successful. We think everything is great, and all the sudden they’re the ones that churn. Customer success is about setting goals with your customers and then working diligently to achieve that. It’s a simple concept, but difficult to achieve.
10. What’s the most dangerous thing you’ve ever done?
I grew up near a ski resort in southern Oregon, right on the California border. I never had any interest in skiing, but I took up this new thing called snowboarding when it first came out. That was back before any safety gear, when the snowboard pretty much resembled a backwards skateboard. I’m always early to things. At the time it was this outlaw thing that people did, who didn’t want to be skiers. We would go on the back part of the mountain and hike up, and there was probably avalanche danger. I did some pretty dangerous things then, but that was a long time ago. Now I lead a very boring and safe life and I just help people with their businesses.
Murphy is the Customer Success Evangelist at Gainsight, driving thought-leadership in the areas of Customer Success Management, customer retention, churn mitigation, and revenue expansion. For the past six years, as Managing Director of Sixteen Ventures, Lincoln has worked with 300+ SaaS companies to rapidly accelerate growth.